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Thursday, July 13, 2017

How Conservatives Could Design a Fair and Efficient Healthcare System if they Took their Time

Senate Republicans fell short in their first attempt
to attract fifty votes for their healthcare bill. Small wonder. The Better Care
Reconciliation Act (BCRA), as it is called, is remarkable in many ways, but perhaps
remarkably of all, it fails to draw on a
large body of conservative reform proposals. As a result, it gives the false
impression that only liberals have given any thought to how to design a fair
and efficient healthcare system.

Now the Senate’s Republican leaders have a second chance.
Instead of rushing something out that isn't much of an improvement, they could use the extra
two weeks they’ve given themselves in August for open hearings on healthcare
reform. If they did so, they would have a chance to hear day after day of
testimony from conservative scholars and policymakers. Here are some key points
that testimony would make, if it had a chance to be heard.

Some of that testimony would focus on the top end of the
spending curve. As the chart below shows (based on data from the National Institute for
Health Care Management Foundation), just 1 percent of the population
accounts for 20 percent of all personal healthcare spending, and the top 5
percent of population for half of all spending. Many people in that range suffer
from one or more chronic conditions like diabetes, kidney failure, or AIDS that
require expensive treatment year after year. Their medical needs are literally
uninsurable by traditional standards. They are not just at high risk of needing
care, they are certain to need it. And even if an insurer could be persuaded to
cover them, an actuarially fair premium would exceed the annual income of all
but the very wealthiest among the

chronically
ill.

Conservatives policy experts have made some very reasonable
proposals for dealing with those at the top of the cost curve. One of the most
attractive is Universal
catastrophic coverage (UCC). UCC would cover the top-of-the curve healthcare
needs of all Americans, subject to a deductible that limited out-of-pocket
expenses to a substantial, but not impossibly high, percentage of their income.

Universal catastrophic coverage has an impeccable
conservative pedigree. It was proposed back in the 1970s by Martin
Feldstein, who would go on to serve as Ronald Reagan’s chief economic
adviser. In 2004, Milton Friedman,
then a Fellow at the Hoover Institution, endorsed the concept. An up-to-date
version, specifically designed to address the problems of the ACA, is outlined
by Kip Hagopian and Dana Goldman in National
Affairs,

The exact parameters of the program would be subject to
negotiation, but, for the sake of discussion, suppose the deductible were set
at 10 percent of the amount by which a household’s income exceeds the Medicaid
eligibility level, now about $40,000 for a family of four. Under that formula,
a middle-class family earning $85,000 a year would face a deductible of $4,500
per family member, with a cap of twice that amount for households of more than
two people. By the same formula, the deductible for a household with a million
dollars of income would be $96,000.

The high-deductible policy might be provided directly by the
government, as an extension of Medicare. Instead, following the Swiss example,
people could choose among private insurers offering policies meeting the
program’s standards. In that case, UCC would resemble an expanded version of
Medicare Advantage—originally a Republican idea that now enjoys bipartisan
support.

People could choose among several ways to meet their
out-of-pocket costs. As explained, for middle-class families, out-of-pocket
costs would be comparable to those now faced under individual policies
purchased on ACA exchanges, while for high-income families, they would be
substantially higher.

One option would be to buy supplemental insurance to cover
all or part of the UCC deductible. Such supplemental coverage would cost far
less than policies now sold in the market for individual insurance, since the
UCC deductible would set an automatic ceiling on claims for which the insurer
would be responsible. Alternatively, people could pay out-of-pocket expenses
from funds accumulated in a tax-deductible health savings account, yet another
conservative idea, and one that is already on the books.

Very likely, many middle-income families would decide simply
to cover all of their routine healthcare costs out of pocket. After all, as the
chart shows, the healthiest 50 percent of the population account for less than
3 percent of all personal healthcare spending, and the next 20 percent of the
population for only another 7 percent of spending. People on the bottom half of
the spending curve could reasonably pay their routine healthcare costs in cash,
as they now pay for oil changes or wiper blades for their cars.

Fiscal conservatives might, quite properly, ask how UCC
could be financed. A large chunk of it could be paid for with another proposal
favored by many on the political right — abolishing the tax deductibility of
employer-sponsored insurance (ESI), which currently costs the federal budget an
estimated
$235 billion per year. That oddity of the U.S. healthcare system is a holdover
from World War II, when employers lavished in-kind benefits on scarce workers
to evade wartime wage controls. Both its liberal and conservative critics say it
is long overdue for repeal.

Liberals object to employer sponsored insurance because it
is inequitable. Suppose the cost of health insurance to your employer is
$10,000 per employee. If that were taxed as ordinary income, you would pay more
tax, but just how much more depends on your tax bracket. If your taxable income
is $200,000 a year, putting you in the 33 percent bracket, the exclusion saves
you $3,300. If you earn $35,000 a year, in the 15 percent bracket, the
exclusion saves you just $1,500 per year. The inequity is even greater for
minimum-wage workers. Higher-paid workers or their or their unions often negotiate
compensation packages that take advantage of the tax deduction by slowing the
growth of cash wages while increasing the share of health benefits. However,
for workers who are already at the minimum wage there is no room for
negotiation. Wages for such workers cannot be cut and must rise when the legal
minimum increases. As a result, the entire cost of ESI falls on employers. That
is one reason why minimum wage jobs are less likely to include health benefits.

Conservatives have other objections. For one, employer-sponsored
insurance imposes disproportionately large administrative burdens on small
businesses, which, unlike large corporations, cannot afford to self-insure.
Furthermore, ESI produces job-lock. Workers who have jobs with good insurance
fear to leave them for jobs elsewhere that would make better use of their
skills, but might not have the same health benefits. Quitting a job with ESI to
work as an independent contractor or start a small business of one’s own is
even riskier.

The BCRA, like the House bill, takes a baby step in the
right direction by lifting the employer mandate that makes ESI compulsory for
firms with fifty or more workers. However, as long as the tax preference
remains in place, workers and many employers still have an incentive to stick
with employer-subsidized insurance, shifting part of its cost to other
taxpayers, low-wage workers, the self-employed, and would-be entrepreneurs.

And what about the poor? Liberal critics look at the way the
BCRA slashes Medicaid and conclude that Republicans simply don’t care whether
the poor have access to health care or not. Maybe that is true for some, but
not all. Medicaid is not the only way to provide healthcare for people with low
incomes.

For example, the Hagopian-Goldman variant of universal
catastrophic coverage could be implemented in a way that would render Medicaid
unnecessary. Suppose, as in our earlier example, the UCC deductible is set at
10 percent of the amount by which household income exceeds $40,000, roughly the
Medicaid threshold for a family of four. The deductible for families below the
threshold would then fall to zero. They would get first dollar coverage from
their UCC policy, so there would be no need for Medicaid as a separate program.
Such a scheme would also increase work incentives for low-income households,
who would no longer have to worry that extra earnings would cause them to lose
Medicaid benefits.

We haven’t even touched yet on measures to control cost. As
everyone knows, medical services, from cancer drugs to bags of saline solution
to hospital stays cost
more in the United States than anywhere else. Conservative policy experts
have many ideas for cutting costs without cutting quality of service.

Encouraging greater
price transparency is one such idea. A report
from the Commonwealth Fund notes that health care is unlike any other market. Patients
rarely know what they'll pay for services until they've received them; health
care providers bill different parties different prices for the same services, and
privately insured patients pay more to subsidize the shortfalls left by
uninsured patients. Prices for the same service vary widely, even though there
is little evidence that higher prices are linked to higher quality. Already,
some thirty states that have policies to encourage more transparent pricing,
although those policies are not uniformly effective. Recently, Representatives
Michael Burgess (R-TX), MD, and Gene Green (D-TX)introduced
legislation at the federal level to promote greater price transparency.

There is some evidence that consumers have not always made
use of healthcare price information even when it has been available. That is
understandable at a time when most people received coverage through their
employers that had only modest deductible and co-pays. However, that seems
already to be changing as employers are imposing greater out-of-pocket costs on
ESI beneficiaries. A system that introduced universal catastrophic coverage and
replaced ESI with individual tax credits and health savings accounts would
encourage greater use of comparative price information if it were available.

Transparency is not the only cost-saving reform backed by
conservatives. They also favor more competition
among hospitals and physician groups, tort
reform to control the high cost of malpractice insurance, and allowing
small businesses to form
groups to buy health insurance, and more. Often conservative cost-cutting
ideas are the same as those advanced by liberals. Last year, polar opposites
Senators Ted Cruz and Bernie Sanders co-sponsored a
bill that would have allowed Americans to import cheaper drugs from Canada.
Why were none of these ideas included in the BRCA, or even openly discussed as
the bill was being formulated?

A word of caution. No one of these conservative ideas for
health reform is a magic bullet. Even among conservative, each has critics as
well as supporters. Liberal reformers have ideas of their own that many people
like even better, ranging from sweeping measures like Sen. Sanders’ Medicare
for All to small tweaks in procedures for approving new drugs. Still, the
conservative ideas cited here are serious proposals with backing from reputable
scholars and policymakers. The scandal is that the secretive process by which
the BCRA was drafted did not even consider them. Really, is it too harsh to say
that the Better Care Reconciliation Act is not about better care at all?

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